Mortgage(s) in Retirement

[ejman]

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Originally Posted by pb4uski Well to begin with, the whole notion of a 95% reduction in stocks is idiotic. Even the Great Depression was "only" 89% and there are more protections against such a decline in place today than back then. Also, it seems likely that there would be second order effects on corporate bonds as well so diversification would be of little protection. I differ from you in that I think the society would collapse and that would be much more worrying to me than having a mortgage. Unless the crash was a one-day event, there would probably come a time where I would do some selling an put the money aside so that I could use it to pay the mortgage. Even if it was a one day event I could sell the remaining 5% and some fixed income assuming those don't crash as well and pay off my mortgage, plant a big garden and continue on. Worst case, I would need to go back to w*rk.

I hope that we don't get to test that idiotic 95% drop notion. I wish I had your faith that the powers that be would be smart enough to protect us but frankly I think that is actually the idiocy.

[pb4uski]

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Originally Posted by ejman I hope that we don't get to test that idiotic 95% drop notion. I wish I had your faith that the powers that be would be smart enough to protect us but frankly I think that is actually the idiocy.

+1 on the first part.

I'm not sure where you get the idea that I have faith in the powers that be are smart enough to protect us. In fact, it is quite the opposite in that if they even just had common sense we wouldn't be in the predicament that we are. However, the powers that be know that if the stock market dropped 95% that they would no longer be in power, so they wouldn't let it happen as a matter of self preservation.

[M Paquette]

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Originally Posted by ejman I hope that we don't get to test that idiotic 95% drop notion. I wish I had your faith that the powers that be would be smart enough to protect us but frankly I think that is actually the idiocy.

The good news is that dividend yield on the S&P 500 index would be something like 50%, and stocks would sell for something less than one year of net earnings, or a month of revenues. Unless you believe that ALL economic activity is going to drop by 95%, in which case there will be... greater concerns...

I'll be opening a ThunderDome franchise...


(The S&P Composite PE ratio reached 32.6 in September 1929, and dropped to a low around 8 with an composite price 86.2% drop, in 1931.)

[militaryman]

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Originally Posted by dmdunca44 We have a mortgage in retirement. Why? Well, when we built our "forever" home, we had enough cash to pay for about 2/3 of the cost. (We married and purchased our first home only 20 years ago). Our current home appraised last year for $400K and our balance is $115K. We COULD pay it off, but our mortgage rate is 3.25% and our nest egg is earning more than that. (Plus we'd have to pay taxes on the withdrawals, so it would cost us even more). We have reliable income from pensions/SS and have no problem making the payments. Having said all that, we hate having a mortgage and are putting an additional $500/mo on the principle to pay it off within the next 4-5 years.

^^^^^^ To me, This is a good answer for the reason to keep the mortgage --- More $$ being made elsewhere means getting rid of mortgage would cost you --- That money difference is what you end up paying for the peace of mind to be debt free if you choose to go ahead and payoff the loan. Some **value** that peace of mind more than others --- To some it is no big deal and for them to not keep the $$ invested and earning them higher returns would feel foolish.

[ejman]

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Originally Posted by pb4uski +1 on the first part. I'm not sure where you get the idea that I have faith in the powers that be are smart enough to protect us. In fact, it is quite the opposite in that if they even just had common sense we wouldn't be in the predicament that we are. However, the powers that be know that if the stock market dropped 95% that they would no longer be in power, so they wouldn't let it happen as a matter of self preservation.

I'm confused (not an unusual situation for me...) At first you disabuse me of the notion that you think the powers that be are smart enough to protect us and then you turn right around and say they will never let it happen because they want to stay in power so which is it?

[Letj]

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Originally Posted by pb4uski +1 I expect to earn 5.5% or better on my investments and am paying 3.375% on my mortgage, so I hope to come out ahead. If my investments cannot provide at least a 3.375% return then having a mortgage will be the least of my worries. While others have peace of mind being mortgage free, I have peace of mind knowing that at anytime I wish I could write a check and pay it off if I wanted to.

+1

[ShokWaveRider]

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Originally Posted by MichaelB So it's a no brainer to have a mortgage, and also a no brainer to pay it off.

YES, BUT it is situation dependent.

1) If you have the money to pay it off, and if your returns on the money that would be in the mortgage is not bringing you out net positive after all costs and taxes, then paying it off is a no Brainer.

2) If the money that would be in a mortgage is bringing in returns net positive after all costs and taxes then it is a no brainer to have a mortgage.

Of course if this positive or negative number is a fraction of a percent at the end of the day, one may consider it a wash. In my case a wash is not good justification in having a mortgage.

I thought I had already made this clear? sorry if I did not.

[rayvt]

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Originally Posted by ShokWaveRider It never ceases to amaze me about how many folk still have mortgages on their main abode after (or during) retirement. Would not paying off a mortgage be a main priority first? ... I would think that NO Debt would be the order of the day. Am I wrong? ... Not at all, please do not be that presumptive, just trying to understand individuals logic and reasoning. ... I was brought up to believe that debt not prudent. In the case of a mortgage interest payments are still interest payments. I believe in the Pay yourself first approach. Why give money to someone. else.

The reason you are having trouble understanding it is that you are looking at the situation from the viewpoint of a paycheck-to-paycheck consumer and/or a person retiring on a shoestring. If you were looking at it from the viewpoint of an astute Financially Independent money manager you'd not be puzzled at all. After all, that's what the F.I. stands for in F.I.R.E. This isn't the Retire Early By The Skin Of Your Teeth board.

Don't look at the mortgage in isolation, as if it were the only piece of your financial life. Look at it a just one piece of the picture, and see how it fits in the whole picture. If someone has $1.5 million in stocks & bonds and a $250,000 mortgage, then they have net assets of $1.25 M. In this picture the mortgage is just a very small piece and has a negligible effect on their cash flow and overall risk.

$250K mortgage at 4% and $1.5 M well-diversified portfolio split $900K in stocks and $600K in bonds? Piffle. No risk at all. BTW, that $600k in bonds is earning around 6% and throwing off $3000/mo income while the mortgage payment is around $1300/mo.

The goal for F.I. is to have enough assets that the only question in regard to a mortgage is whether or not you want the bother of sending in a payment every month.
Well, whether or not you have a monthly mortgage payment, you have plenty of other monthly bills -- electric, gas, cable, phone -- so it's not like the mortgage payment is a lot of additional work.

And if you are cleverly lazy, you just set everything up on automatic bill pay and you only have to mess with it once. Set your bonds to deposit the monthly interest to your checking account and set the mortgage payment to come out of the same account.

[ShokWaveRider]

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Originally Posted by rayvt $1.5 M well-diversified portfolio split $900K in stocks and $600K in bonds? Piffle. No risk at all. BTW, that $600k in bonds is earning around 6% and throwing off $3000/mo income

What are these bond investments that one can get today that throws off 6%? Are they somewhat safe?

[rayvt]

Today? Mostly preferred stocks and various income-related closed end funds. (But you gotta diversify!)
Five-ten years from now? Eventually interest rates will get back up to more typical levels. But that 4.00% FRM will stay at 4% for 30 years.

Of course, you don't get 6% on AAA rated bonds. You have to have a diversified mix of terms and ratings (including some junk bond funds).

As far as preferreds, there is this chart:
http://www.cdx3.net/blog/blog_images/current_snapshot.jpg

Looking at the current table (subscribers only), there are 80 issues that meet all his criteria, and the average yield is 6.73%. Knock out the ones that are more than 4% over par and there are 41 remaining, with an average yield of 6.77% I'm not gonna get into a big debate about preferreds or junk bonds, but just point out that it's possible to get 6% yield with a certain degree of safety.

===============================================

See, the great thing about applying astute money managment is that a 4% mortgage will stay 4% forever, and you can earn almost that or more with various fixed-income investments. With the extra margin of safety being that you have plenty of liquid assets & interest income to cover the mortgage.

[haha]

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Originally Posted by ShokWaveRider It never ceases to amaze me about how many folk still have mortgages on their main abode after (or during) retirement. I can understand it on a second home. I read about people refinancing etc. at good rates, not sure if all are retired or not. Would not paying off a mortgage be a main priority first, in order to have an affordable ER or R for that matter. It was certainly a priority for us before we retired the first time. I guess if one has a high steady income or something it may not affect them. But I somehow think that most of us are not in that position. While we are probably comfortable, I would think that NO Debt would be the order of the day. Am I wrong?

Clearly you are wrong if you are saying that retired people will always look to have a paid off mortgage. Reading this site shows that some will prefer to have a mortgage. If you are stating your opinion, why ask if you are wrong? How could you be wrong? After all, it is only one person's opinion, and yours should be as good as anyone else's.

Quote:

Originally Posted by ShokWaveRider What are these bond investments that one can get today that throws off 6%? Are they somewhat safe?

I can tell you categorically that some of these will be somewhat safe. But that is a fairly low bar; and maybe too low.

Ha

[LakeTravis]

It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

[REWahoo]

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Originally Posted by LakeTravis It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

Totally unfounded premise. Once that asteroid hits there won't be any more property taxes.

[rayvt]

Property taxes, yes. I just looked up the current tax on our house in Chicago, that we sold when we retired and moved down South.
The current tax is $1175/mo ($14,101 annual). My current mortgage payment here is $1300/mo.

[ejman]

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Originally Posted by LakeTravis It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

Not in Oregon. Once you attain senior hood failure to pay taxes simply results in a lien on one's house payable upon one's demise as part of settling the estate. The State can not kick you out of your house for failure to pay property taxes. Once you pay off the mortgage in Oregon, that baby is YOURS!

There may be other states that have similar provisions- dunno

[ejman]

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Originally Posted by REWahoo Totally unfounded premise. Once that asteroid hits there won't be any more property taxes.

Uh, I call the odds slightly different:

Chance of a major economic depression occurring with market dropping ~ 90% - maybe once in a 100 years.

Chance of the civilization obliterating asteroid hitting the earth- well, the last really big one was about 70 million years ago.

So let's see if I live to 100 (currently 62) the chances of the last one occurring in my lifetime are 100/70,000,000, the chances of the first one are 100/100 and I don't like that number...

Wow, I just noticed I turned over 500 posts so after 10 years of ER I finally have a full time job...

[LakeTravis]

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Originally Posted by rayvt Property taxes, yes. I just looked up the current tax on our house in Chicago, that we sold when we retired and moved down South. The current tax is $1175/mo ($14,101 annual). My current mortgage payment here is $1300/mo.

Yup. Ours last year (Texas) were over $16,000 annual.

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Originally Posted by ejman Not in Oregon. Once you attain senior hood failure to pay taxes simply results in a lien on one's house payable upon one's demise as part of settling the estate. The State can not kick you out of your house for failure to pay property taxes. Once you pay off the mortgage in Oregon, that baby is YOURS!

They will certainly take it in Texas. Although there is a little known and seldom exercised tax deferral available to over-65. As long as there is no lien on the homestead, you can defer property taxes and not pay them every year. They continue to accrue and are assessed an 8% annual interest rate and then have to be paid when the property changes hands.

[REWahoo]

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Originally Posted by ejman Uh, I call the odds slightly different: Chance of a major economic depression occurring with market dropping ~ 90% - maybe once in a 100 years. Chance of the civilization obliterating asteroid hitting the earth- well, the last really big one was about 70 million years ago. So let's see if I live to 100 (currently 62) the chances of the last one occurring in my lifetime are 100/70,000,000, the chances of the first one are 100/100 and I don't like that number... Wow, I just noticed I turned over 500 posts so after 10 years of ER I finally have a full time job...

With that many posts under your belt I would have thought you'd be able to recognize I was joking...

[Nords]

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Originally Posted by ShokWaveRider YES, BUT it is situation dependent. 1) If you have the money to pay it off, and if your returns on the money that would be in the mortgage is not bringing you out net positive after all costs and taxes, then paying it off is a no Brainer. 2) If the money that would be in a mortgage is bringing in returns net positive after all costs and taxes then it is a no brainer to have a mortgage. Of course if this positive or negative number is a fraction of a percent at the end of the day, one may consider it a wash. In my case a wash is not good justification in having a mortgage. I thought I had already made this clear? sorry if I did not.

http://www.early-retirement.org/foru...ets-15237.html

We have the money to pay it off, I have a rock-solid pension, and we expect to (eventually) make more money on the invested funds than we'd make by paying off the mortgage.

I don't think the word "no brainer" is an appropriate assessment of the labor involved in the analysis.

[sheehs1]

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Originally Posted by Finance Dave Perhaps you don't consider this a "good" reason, but in Indiana where I live, you lose a property tax deduction if you don't have a mortgage...it's called the "mortgage exemption". Property taxes increase when your mortgage is paid off...the bank files a document with the county assessor and this happens automatically. The amount is modest...for us $300/year on a house worth about $350k. For the record, we "sort of" paid our mortgage off last November. We are not yet FIREd, and have high incomes. We noted last year that we had 3 years left on our 15-year fixed rate loan at 5.125%. We then noted we could get a HELOC for 3.25% with no closing costs or fees. So, the math seemed pretty easy...take out a HELOC for the amount due on the mortgage, and pay it off...so we did. Now we owe the same amount (less any payments made since then) on our HELOC that we did on the primary mortgage. When we got our bonuses in April of this year, we put all $25k of the money (after taxes were deducted) against the HELOC...so now the balance is very small...and we should have it paid off in about 16 months. One watch-out with this strategy...HELOCs are VARIABLE rate loans. So if you plan to use one for a longer term, you are exposing yourself to interest rate risk. In our case, the rate was fixed for one year, and then is tied to a federal reserve rate....which Geitner clearly noted they would not be increasing for "the foreseeable future"...so we felt pretty good that we could pay it off before rates increased. As a last resort...we could use our emergency fund to pay it off....we carry an e-fund of 9 months expenses...and most experts recommend 3-6...so we have a bit of cushion there. IMO there is a certain "peace of mind" to having the mortgage paid. There are occasions where we'll take on debt...but we always have a solid plan to avoid risks. For example, if we buy a new car and Ford is offering 0% financing, we'll do it...even if we have the money to pay for the car cash....then we'll put that money in a CD or similar fund and pay off the loan as needed.

We did the same thing. The HELOC will "sort of" be paid off in 18 months when I officially retire. However, when it gets down to the last $5,000, I'll only be making small payments on it as I don't want to close the line. I want to keep the "what is now over" a 100% equity line at 2.5% as long as the rates stay that low. Feels good to have access to the credit without having to go to a bank in the event we EVER buy that 2nd home or do major home improvements etc....without touching nest egg dollars.